I interpret the
whole sequence where Joe kills 3 people trying to kill one as a manifestation
of Diane's misgivings about the professional abilities of the man she hired to
kill Camilla. Remember, it's her dream. In this light, the pretext of why Joe
had to kill Ed in the first place is less important. Seeing the
black book at
the diner would have naturally prompted Diane's curiosity about how he
operated.
The fact that Joe is looking for Rita in this scene is consistent with the
idea that his attempt to kill her failed, a construction in the sleeping mind
of Diane. Having had Camilla killed, Diane now dreams that Camilla somehow
escaped her fate (by the grace of the drunken teenagers crashing into the
limo). It is easy to imagine that the part of Diane that desires Camilla wants
her to be alive, as well as the part of Diane that feels guilty for having
ordered her death. - (Carla Beaudet)

The book appears
to be a threat, showing the hit man during a previous hit, before Diane hired
him to do Camilla. Her dream of the messed up murder of the long-haired guy
is
part of her wishful-thinking fantasy that he was actually incompetent, hence
she could dream that his hit on Camilla had gone awry, which allowed Camilla
to come back to Diane/Betty in her dream/fantasy. - (Ellen
Gwynn)

Joe
and the prostitute

Moreover, we also
see the hit man in another scene seeking for Rita when he asks a prostitute
about her, something that enhances the feeling of persecution for Rita. These
things give more strength to Betty's protective role in the fantasy, where
Camilla/Rita is in the need of this protection and dependence; if Rita was not
still in danger after the car crash, Betty wouldn't be so necessary, and her
fantasy wouldn't be truly fulfilled. Here we see how Diane breaks the link
between herself and the hit man, dissociating completely the person who wanted
Camilla dead (Diane) and the person who loved her (Betty). -
(Maia George)

Through a series of phone calls that
Mr.
Roque initiates, the search reaches the streets. Joe the hit man (Diane’s pimp?) asks a prostitute (Diane’s reallife
co-worker?), "Any new girls on the street?" At least two different elements
of "detection" may be discerned here. On the one hand, Joe may be acting as a stand-in for the
detectives who are actively seeking to solve the
murder mystery involving Camilla Rhodes. Subconsciously, Diane knows that she is a suspect in the crime investigation under way. On the other hand,
it is also possible that Diane’s repressed rage against Camilla has taken the
form of yet another role reversal. Perhaps Diane’s unconscious has placed Camilla on the streets, substituting her professional rival (and fickle partner
in love) for Diane’s own unconscionable fall to soliciting tricks on the dismal
outskirts of Hollywood. - (Richard K.
Sherwin)

Joe
is having mismatched eyes (one dark and one blue eye) in Diane's dream, but
a pair of blue eyes
in her flashback. Is it that she couldn't remember what eye color he had
when she met him in real life and so her mind came up with a kind of
hybrid? Or is it meant to visually bridge the eye color of Diane
and Camilla?

Trivia:
The actual condition of having mismatched eye colors is Heterochromia.

The
assassin with his short blonde hair, kills his a friend with his long dark
hair is another parallel to Diane and Camilla, because they were also friends
once. - (Alan Shaw)

Trivia

This black and
comical, absurdly violent scene [hit massacre] was, unsurprisingly, one of the
scenes that caused problems with the ABC network. Rather than the standard
gripe about slow pacing, they objected to the graphic detail of the central
assassination, and the black comic element of the stray bullet hitting the fat
woman's buns. It's unlikely to be a coincidence that the executives viewed
Lynch's cut of the pilot very shortly before the entire TV industry came under
pressure from Washington, in the immediate aftermath of the April '99
Columbine High School massacre. (Weirdsville USA: Obsessive Universe of David Lynch)

Mark
Pellegrino played the role of a mobster in the Coen bros
"The Big Lebowski" (1998).